Real Estate Investment Trusts

Real Estate Investment Trusts

February 01, 2014

Real estate investment trusts may be easier for corporations to create through tax-free spinoffs of real estate assets than thought earlier.

William Alexander, IRS associate chief counsel for corporate issues, suggested at an American Bar Association tax section meeting in Phoenix in late January that a corporation can do a tax-free spinoff of real estate assets without showing any business purpose other than the advantages of raising capital in the public markets against that segment of the corporation’s business. A tax-free spinoff normally requires a business purpose.

“If you are doing this with the intention that the REIT access the capital market, then I think that you would meet the test,” Alexander said. He added that the analysis would not be the same for a private REIT that will not raise money in the equity capital markets.

REITs can raise capital more cheaply than regular corporations because a REIT is not taxed on the share of its earnings that it distributes to shareholders. Several REITs have been formed to invest in renewable energy projects, but their efforts have been hampered by reluctance by the IRS in Washington to classify solar panels and wind turbines as real property for REIT purposes. Machinery is not real property. The White House has been urging the Treasury to issue a revenue ruling classifying significant parts of solar and possibly wind projects as real property for REIT purposes. Any decision to classify such assets as real property could create other complications.

Meanwhile, data centers, casinos and others are spinning off buildings and land into REITs and leasing them back from the REIT as a way to monetize assets. The IRS released the first private letter ruling approving a tax-free spinoff of a standalone REIT by a corporation in September 2013. The ruling is Private Letter Ruling 201337007. It appears to have been issued to casino owner Penn National Gaming, Inc., which did a tax-free spinoff of its casino facilities into a REIT in November 2013.

by Keith Martin